Commercial Loan Underwriting Explained: What Borrowers Need to Know
When you apply for financing on an income-producing property, the lender doesn’t just look at you — they look at the property itself as a business. This process, called commercial loan underwriting, determines whether the deal makes financial sense and what terms the lender can offer.
Underwriting in Simple Terms
Underwriting is the lender’s way of answering:
👉 Does the property generate enough income to cover its expenses and the debt we’re being asked to provide?
For income-producing assets — such as apartments, retail centers, offices, and industrial buildings — the underwriting focuses heavily on the property’s cash flow and market fundamentals.
The Key Factors Lenders Evaluate
Net Operating Income (NOI): Income minus operating expenses. This shows true property profitability before debt service.
Debt Service Coverage Ratio (DSCR): NOI ÷ Debt Payments. Lenders typically want 1.20x–1.40x, meaning the property produces at least 20–40% more income than needed to pay the loan.
Loan-to-Value (LTV): Loan amount ÷ Property value. Most income-producing properties fall in the 65%–75% range.
Tenant Quality & Lease Terms: Credit strength, lease length, and stability of tenant base.
Market Conditions: Local vacancy rates, rent trends, and comparable property performance.
Think of underwriting like a health check-up for the property. Just as a doctor looks at vital signs to assess overall health, lenders review NOI, DSCR, and LTV to measure whether the property is “fit” to carry the loan.
Benefits of Obtaining Financing Subject to Full-Documentation Underwriting
Better Loan Terms – Higher leverage and lower rates for properties with stable income.
Faster Approvals – A well-organized financial package speeds up lender decision-making.
Investor Confidence – Thorough underwriting reassures both lenders and potential equity partners.
Challenges for Borrowers
Documentation Heavy – Requires full rent rolls, operating statements, leases, tax returns, and more.
Strict Ratios – If NOI or DSCR fall short, loan amounts may be reduced.
Market Dependence – Even strong operators can face tighter underwriting in soft markets.
Lesson Takeaways
Commercial loan underwriting is all about the property’s ability to pay for itself. By preparing clear financials and understanding how lenders view income-producing assets, borrowers can position themselves for stronger approvals and better financing terms.
At FCAR Capital, we guide clients through underwriting requirements, packaging deals effectively, and structuring loans that work for both lenders and investors.
